27 Apr 2016
AUD: Iron ore oversupply remains - Nomura
Charles St-Arnaud, Research Analyst at Nomura, notes that despite the increase in iron ore prices, the oversupply is likely to remain in the medium term.
Key Quotes
“Iron ore and steel prices picked up significantly in recent weeks. This is in due to the seasonal pickup in construction activity and to lower-than-usual inventories following a reduction in steel production last year. Recent market activity levels point to increased speculative activity on the back of the Chinese government stimulus and its expected impact on construction and infrastructure investment.
We noted last week that the level of activity in the iron ore futures markets was reaching record. For example, last Thursday, the volume of iron ore trade through the May contracts was equivalent to about two-thirds of Chinese imports over the previous 12 months. A similar record level of activity was also seen in steel rebar futures contracts.
With this in mind, the strong increase in iron prices that resulted from this speculative activity looks increasingly unsustainable. The question here is the timing for a correction in iron ore prices and the AUD. Given that some of the increase in iron ore prices was driven by increased construction sector activity, it will be worth monitoring for any slowdown, as it could be a sign that demand for steel is waning.
We have already seen iron ore and rebar prices decline by about 10% and 6%, respectively, since last week’s changes to margin policies to reduce speculative activity. In the meantime, the AUD is likely to remain supported by risk appetite and to continue to attract foreign inflows given its high yields, in our view.”
Key Quotes
“Iron ore and steel prices picked up significantly in recent weeks. This is in due to the seasonal pickup in construction activity and to lower-than-usual inventories following a reduction in steel production last year. Recent market activity levels point to increased speculative activity on the back of the Chinese government stimulus and its expected impact on construction and infrastructure investment.
We noted last week that the level of activity in the iron ore futures markets was reaching record. For example, last Thursday, the volume of iron ore trade through the May contracts was equivalent to about two-thirds of Chinese imports over the previous 12 months. A similar record level of activity was also seen in steel rebar futures contracts.
With this in mind, the strong increase in iron prices that resulted from this speculative activity looks increasingly unsustainable. The question here is the timing for a correction in iron ore prices and the AUD. Given that some of the increase in iron ore prices was driven by increased construction sector activity, it will be worth monitoring for any slowdown, as it could be a sign that demand for steel is waning.
We have already seen iron ore and rebar prices decline by about 10% and 6%, respectively, since last week’s changes to margin policies to reduce speculative activity. In the meantime, the AUD is likely to remain supported by risk appetite and to continue to attract foreign inflows given its high yields, in our view.”